Friends, Family Should Be Off Limits

MATT MALONEY:Friends and family investing makes for spectacular holiday meals. Either you’ll be the toast of the table or the scourge.

Money from friends and family is a replacement for your personal funds. If you don’t have enough resources to fund your startup, many look to leverage, and risk, personal relationships.

Funding your startup with revenues from actual customers – or bootstrapping — is the best way to grow your business. But some firms require more capital to capture their market opportunity than what bootstrapping can support.

My preference for outside capital is professional investors who should bring value beyond their money. Your family may support your crazy idea but investors require a more thought through plan. Investors will also typically come to the table with strategic experience and valuable networks for potential employees or exits.

I believe that your friends and family should be off limits as potential investors in your seed stage startup. If you must take family money, make sure they are invested alongside a professional investor and do not have the expectation that they are a meaningful part of your team. Armchair quarterbacks are not helpful when the stakes are this high.

About The Accelerators

For aspiring or actual entrepreneurs, The Accelerators is an online archive of discussion among startup mentors– entrepreneurs, angel investors and venture capitalists. Although the blog is no longer being updated, its content lives here and you can see an archive of its tweets through June 2015 @wsjstartup.